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Mexico's Calderón Takes on Big Labor

Its state-owned electricity company was bleeding the national treasury dry.

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Mary Anastasia O'Grady

Updated Oct. 19, 2009 10:16 a.m. ET

Big Labor is the big reason Barack Obama is in the White House. And from new import tariffs on tires made in China to the government's restructuring of Chrysler that put the union ahead of senior creditors, the shop bosses already have a nice return on their investment. Even so, all indications are that this first nine months' work is merely a down payment.

One sign that there is more to come is the administration's decision to bulk up on corporatists—those central planners who see a "pact" among business, labor and government as the final solution to the riddle about how to divide up society's pie. For proof that Mr. Obama is now channeling his inner peronista, look no further than his decision to bring Ron Bloom, a labor lawyer for the United Steel Workers, into the White House to run "manufacturing policy."

The Mexican Union of Electricians protests the government's decision to liquidate the state-owned electricity company in Mexico City.
Associated Press

If Mr. Obama succeeds in turning the U.S. economy over to organized labor, the American dream is going the way of the dodo. But don't take my word for it. Just look at countries that have been there and done that and are now struggling to go in the opposite direction because they are tired of being poor.

Eight days ago, just after midnight on a Sunday morning, Mexican President Felipe Calderón instructed federal police to take over the operations of the state-owned electricity monopoly, Luz y Fuerza del Centro (LyFC), which serves Mexico City and parts of surrounding states. The company's assets will stay in the hands of the government but will now be run by the Federal Electricity Commission (CFE), a national state-owned utility and the major supplier of LyFC's energy.

The net effect of the move is to dethrone 42,000 members of the Mexican Union of Electricians, which had won benefits over the decades to make Big Three auto workers in Detroit blush. When the liquidation is complete, it is expected that the company will employ about 8,000. To appreciate the magnitude of Mr. Calderón's decision, think of Ronald Reagan's firing of the air traffic controllers—only bigger. As one internationally renowned Mexican economist remarked on Sunday, it is "the most important act of government in 20 years."

Why is it such a big deal? For starters, because the Mexican political system, since the Revolution of 1910, has been dominated by the power of organized labor. In Mexico's corporatist theology, the people are taught to worship the State, and the State bows to the union bosses, who symbolize economic nationalism.

Somewhere in this idealism is the promise to elevate workers, as Diego Rivera envisioned in his anticapitalist murals featuring masses of clenched fists. Yet all Mexican corporatism ever did was make the country poorer. The most famous example of this is the state-owned oil monopoly, which thanks to union rule is incapable of monetizing the millions of barrels of black gold it sits on. LyFC is an equally good example of how unionism has been destroying Mexico's future.

The union at LyFC is one of Mexico's oldest and politicians have long understood that they must never, ever touch its privileges. Yet its reputation for inefficiency, waste and corruption is legendary. In the mid-1970s, President Luis Echeverría tried to liquidate the company and put its assets under the control of its supplier, CFE, but organized labor defeated him. After that no president dared—until last week.

What drove Mr. Calderón to take such radical action is not hard to fathom. LyFC losses were mounting because the union's productivity is a fraction of that of CFE and because the company balance sheet has been hemorrhaging due to technical problems as well as electricity theft. Its costs were twice its revenues, and this year the treasury (Hacienda) would have had to subsidize it to the tune of $3.5 billion to keep it above water. Hacienda points out that CFE operates without any subsidy and with the same rates for customers.

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What is more, LyFC has become a power fiasco. The company is infamous for service interruptions and voltage irregularity, and it has not been able to meet rising demand. Mexican hopes for improving living standards depend on new business investment. That's not going to come if the electricity infrastructure is stuck in the mid-20th century.

The union was out in the street in full force last week, and it says it will fight the liquidation in court. The administration contends that the company was founded by executive decree and can be extinguished the same way. But Mr. Calderón may also find popular support for his decision. The union had become so powerful that it won an agreement to have pensions go up at twice the rate of salary increases.

Politicians undoubtedly found such generosity to be the path of least resistance. But now the bill has come due, and the rest of the country doesn't want to pay it. There's a lesson here somewhere for Mr. Obama.